Investiv Daily

19 Jun
PEP is up more than 10% in the last month; is there any upside left?
Over the last few years, it seems that an ongoing discussion is the trend away from sugary soft drinks to healthier alternatives – or to snazzier, caffeine-laden energy beverages. That’s a little ironic when you look at the direction of PEP’s long-term trend, which is clearly up over the last five years, but has been showing uncertainty for the past year. More recently, the stock has been rallying from a intermediate, downward trend low at around $96 in early May to about $106 per share. Bullish investors will almost certainly be tempted to look at that rally as a strong indication of a trend reversal, and there do appear to be some signs that could be the case. There are other indicators, however that point in the opposite direction, meaning that bullish investors should be very cautious right now about jumping whole-heartedly into long stock or call option trades.

PEP is a stock that, besides some of the elements that I’ll outline below, could be negatively impacted by trade tariffs between the U.S. and its trade partners. The recent imposition of tariffs by the Trump administration on steel and aluminum means that one of this business’ core costs is likely to increase for as long as tariffs and trade tensions continue. I think that this is also an example of a business that won’t simply absorb that increase into their existing cost structure, choosing instead to test consumer’s willingness to pay more for their products.

Fundamental and Value Profile

PepsiCo, Inc. is a global food and beverage company. The Company’s portfolio of brands includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. The Company operates through six segments: Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), North America Beverages (NAB), Latin America, Europe Sub-Saharan Africa (ESSA), and Asia, Middle East and North Africa (AMENA). The FLNA segment includes its branded food and snack businesses in the United States and Canada. The QFNA segment includes its cereal, rice, pasta and other branded food businesses in the United States and Canada. The NAB segment includes its beverage businesses in the United States and Canada. The Latin America segment includes its beverage, food and snack businesses in Latin America. The ESSA segment includes its beverage, food and snack businesses in Europe and Sub-Saharan Africa. The AMENA segment includes its beverage, food and snack businesses in Asia, Middle East and North Africa. PEP has a current market cap of $149.4 billion.

Earnings and Sales Growth: Over the last twelve months, sales and earnings both increased only slightly. EPS growth was a little over 2% while sales growth was just higher than 4%. This is reflective, I believe of the general consumer trend I referred to earlier, with a large number of consumer shifting their beverage preferences away from traditional soft drinks.

Free Cash Flow: PEP has generally healthy free cash flow of a little over $6 billion over the last twelve months. This number has declined from a mid-2016 high of $ billion, and dropped sharply from the last quarter of 2017 from $7.2 billion. A confirmation of this as a generally negative measurement comes from net income versus revenues, which was 10.7% in September of 2017 but is now just over 7% as the most recent quarter.

Debt to Equity: the company’s debt to equity ratio is 2.91, which is high and by most indications would be a warning sign; however it should also be noted that this is pretty consistent with the Beverages industry. The company’s balance sheet indicates operating profits are adequate to service their debt, with more than adequate cash and liquid assets to supplement any operating shortfall.

Dividend: PEP pays an annual dividend of $3.71 per share, which translates to an annual yield of 3.5% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for PEP is $7.75 per share. At the stock’s current price, that translates to a Price/Book Ratio of 13.63. This is almost twice as high as the industry average, which is 7.7, and almost 50% above the stock’s historical average of 9.2. A move to par with the historical average would put the stock’s price just above $70 per share – more than 30% below its current price, and at levels the stock hasn’t seen since late 2012.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: PEP’s rally for the last month is pretty easy to see, and contrasted against the strength of the intermediate downward trend I’ve indicated with the diagonal orange line, would normally look like a breakout and subsequent trend reversal. The diagonal red line, however, traces the stock’s long-term downward trend, which has acted as strong resistance over the last couple of days and could be the mechanism that halts the stock’s short-term momentum. Near-term support (or downside) is back around $96, where the rally started last month, while a break the red trend line, to about $108 could give the room to to only around $113 per share before it finds its nearest support. From the standpoint of reward: risk, for a bullish trader that is only about $7 of upside potential versus nearly $10 of downside risk – hardly worth taking a bullish trade right now.

Near-term Keys: I expect geopolitical concerns could continue to weigh on this stock for the time being. If the stock manages to push to $108, I would look for positive momentum to break through the $113 before looking for a bullish trade. On the other hand, given the stock’s current pivot lower off of trend resistance, the time could be optimal right now for a bearish trade, either by shorting the stock or buying a put option.
By Thomas Moore Consumer Staples Investiv Daily Tariffs
18 Jun
WBA looks like it could be ready to break out
If you pay attention to the Pharmacy segment of the Food & Staples industry, a lot of the attention over the last few months has focused on companies other than the stock I’m highlighting today. Amazon (AMZN) doesn’t work in this space, but after acquiring Whole Foods last year, the market loves to guess about their next vertical acquisition target. Rumors not long ago that they might start looking at ways to enter the pharmacy business sent a lot of investors running away from the established companies in this segment as quickly as possible. CVS Health Corporation (CVS) caught some buzz by announcing their intentions to acquire Aetna Inc. (AET), another example of vertical integration with some intriguing implications and opportunities for the future. And while Walgreens Boots Alliance Inc. (WBA) hasn’t been sitting idle, their acquisition of more than 1,600 Rite Aid (RAD) stores for about $3.6 billion in cash this spring didn’t really turn many heads. It’s a more traditional, consolidation-oriented transaction that I guess just doesn’t boast the sexy sheen that excites investors right now.

That’s actually too bad, because if you dive into WBA’s fundamental and technical profile, you see a stock that looks like it could be poised on the verge of a bullish long-term trend reversal. It’s true that none of the effects – including the $3.6 billion spent to acquire those RAD stores, or the increase in debt that will probably be a natural result from it – have yet to be seen in any financial disclosures, but the company is scheduled for its first quarterly earnings announcement since the purchase closed on June 28. Depending on what kind of information is provided, that report could act as a strong upside catalyst. Let’s dive into the details as they currently stand.

Fundamental and Value Profile

Walgreens Boots Alliance, Inc. is a holding company. The Company is a pharmacy-led health and wellbeing company. The Company operates through three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The Retail Pharmacy USA segment consists of the Walgreen Co. (Walgreens) business, which includes the operation of retail drugstores, care clinics and providing specialty pharmacy services. The Retail Pharmacy International segment consists primarily of the Alliance Boots pharmacy-led health and beauty stores, optical practices and related contract manufacturing operations. The Pharmaceutical Wholesale segment consists of the Alliance Boots pharmaceutical wholesaling and distribution businesses. The Company’s portfolio of retail and business brands includes Walgreens, Duane Reade, Boots and Alliance Healthcare, as well as global health and beauty product brands, including No7, Botanics, Liz Earle and Soap & Glory. WBA has a current market cap of $63.4 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 27%, while sales grew a little over 12%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.

Free Cash Flow: WBA has solid free cash flow of a little over $6.3 billion over the last twelve months. This number has declined a bit from the first quarter of 2017, when it was a little over $7 billion, but is much higher over the last four years, when it hit a low in June of 2014 at around $2.5 billion. This number should drop again in the next quarter as a reflection of the RAD stores purchase, though exactly how much it will drop remains to be seen.

Debt to Equity: the company’s debt to equity ratio is .44, which is low and should generally be quite manageable. Long-term debt has also dropped by more 30% over the last two years, from around $19 billion to the levels reported in its last earnings report. This is another number that I expect will increase, but how much also remains to be seen.

Dividend: WBA pays an annual dividend of $1.60 per share, which translates to an annual yield of 2.5% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WBA is $28.42 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.25. This is inline with the industry average, which is 2.3, but below with the stock’s historical average of 2.9. A rally to par with the historical average would put the stock’s price above $82 per share – almost 30% above its current price. This really suggests the stock is legitimately undervalued right now.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: WBA’s downward trend started in September of last year, which marks the beginning point for the diagonal red line on the chart above. The downward trend has extended to the current date, with the stock finding consistent support around $62 in April, May, and earlier this month. It also appears to be dropping lower right now off of pivot high resistance around $65 per share. That range – $62 to $65 – has defined a pretty consistent trading range since April, and would mark the levels the stock would need to break to either extend the downward trend even lower or reverse the trend and begin to reclaim its previous highs.

Near-term Keys: The key for WBA is most likely to come from its June 28 earnings announcement, so investors would be wise to watch the stock’s price from that point forward. A break above $65 would probably offer a good short-term bump to at least $70 per share, with its January peak around $80 – which would be nearly at par with its historical Price/Book ratio – attainable as a longer-term target. If the stock breaks below $62, it could drop as low as $51 before finding new support, based on historical pivots below the the $62 range.
By Thomas Moore Consumer Staples Investiv Daily Retail
15 Jun
U.S.-China trade war could really hurt WMT
This morning marked the opening of yet another chapter in the drama that is U.S. trade diplomacy. The Trump administration announced this morning that U.S. Customs and Border Protection will begin to collect tariffs on the first $34 billion worth of Chines imported goods on July 6. This is the next step in the implementation of duties first announced in March of this year on approximately 1,300 different finished goods imported to the U.S. by its largest trading partner. The final $16 billion of a proposed $50 billion total of tariffs is still under review.

This is a clear escalation of the two nation’s ongoing trade dispute, and not surprisingly China responded quickly, saying that they will act quickly to “take necessary measures to defend our legitimate rights and interests.” They have previously threatened their own set of tariffs on a wide ranging list of U.S. product ranging from soybeans and meat to whiskey, airplanes and cars.

It’s one thing to watch the news and listen to talking heads wring their hands and bemoan the negative effects that an extended trade war would have on economic growth. And that’s not to say that they’re wrong; over the long-term, a trade war could bleed into virtually every part of the U.S. economy. Keep in mind that virtually every kind of finished product uses steel or aluminum, which is the basis for the first round of tariffs that Trump first started talking about three months ago. The real question for the average American is where those negative effects are most likely to be seen hitting their wallet. I think one of the first, and most vulnerable places can be found not far from where you live. Walmart Inc. (WMT) sources 75% of its merchandise from China, and that puts one of the largest retailers in the country literally on the cutting edge of what is happening right now.

This isn’t an unrealistic argument; one of the ways WMT has always differentiated itself from its competitors is as the low-cost leader for consumers. The longer a trade war takes to find a resolution, the more their costs on the vast majority of goods that fill their shelves are going to rise. As you’ll see below, WMT simply doesn’t have much ability to absorb those costs to keep them from passing through to their customers. That begs a question that only each customer can answer: if that item – whether it be a shirt, a power tool, a toy, or an electronic gadget – that you’re used to getting from WMT costs 25% or more than it used to, are you going to be more or less likely to buy it?

Current consumer trends suggest that in the case of luxury items – say, an $80 shirt – a lot of consumers that are already willing to pay that much for a shirt will probably also pay $90 to $100 for the same item. That is usually less true when the conversation shifts instead to bargain-priced items, like a $20 shirt. That puts WMT in the very difficult position of watching its operating margins erode even more by absorbing increasing costs to keep sales high or pass those costs to their customers, who may simply choose not to make the same purchases they used to. Neither scenario works out very favorably for the company’s bottom line.

Fundamental and Value Profile

Walmart Inc., formerly Wal-Mart Stores, Inc., is engaged in the operation of retail, wholesale and other units in various formats around the world. The Company offers an assortment of merchandise and services at everyday low prices (EDLP). The Company operates through three segments: Walmart U.S., Walmart International and Sam’s Club. The Walmart U.S. segment includes the Company’s mass merchant concept in the United States operating under the Walmart brands, as well as digital retail. The Walmart International segment consists of the Company’s operations outside of the United States, including various retail Websites. The Sam’s Club segment includes the warehouse membership clubs in the United States, as well as samsclub.com. The Company operates approximately 11,600 stores under 59 banners in 28 countries and e-commerce Websites in 11 countries. WMT has a current market cap of $246 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by 14%, while sales grew a little over 4%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations. Diving a little deeper, however provides a good look at the reason you should be concerned about increasing costs from tariffs on Chinese goods. As of the company’s last earnings report, WMT had more than $500 billion in revenue, with net income of almost $9 billion. Net income is calculated by subtracting the costs of doing business from revenues, which it means it provides the baseline for the earnings per share number you and I use to measure a stock’s profitability. Comparing net income to total revenues gives you an idea about what kind of profit margin the company is working with. For WMT, that number is only 1.77%, a very low number that implies they work with very narrow operating margins.

Operating Trends: WMT has been doing a great job of growing revenues, and since late 2014 they’ve grown from about $470 billion to their current level of a little over $500 billion. Over the same period, the reverse is true about their net income, which has dropped more than 50% from a high a little above $17 billion to just under $9 billion currently. That negative trend is also reflected in the decline of net income as percentage of revenue, which was about 3.6% at the end of 2013 but, as already observed is now only 1.77%. The company’s margins have already been under considerable pressure for some time, which further bolsters the argument they just don’t have a lot of wiggle room to work with.

Debt to Equity: the company’s debt to equity ratio is .46, which is low and should generally be quite manageable. WMT has also done a good job decreasing their total long-term debt since the first quarter of 2014, from more than $45 billion to a current level of about $29.4 billion.

Dividend: WMT pays an annual dividend of $2.08 per share, which translates to an annual yield of 2.49% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WMT is $26.44 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.15. This is below the industry average, which is 4.0, but inline with the stock’s historical average, which to me suggests the stock is fairly value right now, with limited upside potential in the long-term.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action: The stock has declined from a high around $110 in January to its current level around $83. That’s a drop of more than 25%, which at first blush might look pretty good for a stock that a lot of value investors would say has a lot of stickiness; that is, they will continue to generate high revenues even if a healthy economy begins to struggle, because consumers will continue to spend their money there. That is a true statement when it comes to WMT, but as observed above, I think the risk comes from what will happen as their costs increase. Will they continue to generate attractive profits, or will their margins erode? The risk is much higher they will erode.

Trends and Pivots: I’ve drawn two lines to illustrate where I think the stock’s real downside lies right now. The horizontal red line is just below the stock’s current level at about $82 and appears to be acting as good support right now. The horizontal blue line is drawn at the stock’s multi-year low, which was reached in February of last year at around $66. The red bidirectional arrow emphasizing the $16 per share difference between the stock’s current price and that low point is, I think a clear indication of investor risk right now. That’s a downside risk of just a little less than 20% right now. I also see little reason – fundamental or technical – to suggest the stock should reverse the intermediate-term downward trend anytime soon, which means that risk right now is much higher than any potential reward.

Near-term Keys: Watch the stock’s movement carefully over the next few days. A move to $90 would mark a reversal the intermediate trend’s downward strength and would act as a good signal point for a good bullish trade, either by buying the stock or working with call options. On the other hand, a drop below $82 would mark a major support break, with a drop to the aforementioned $66 level likely before any new significant support is reached.
By Thomas Moore China Defensive Stocks Global Risks Investiv Daily Retail Risk US Politics
14 Jun
FAST looks like an interesting short-term set up
My personal preference when I look at different stocks as investing opportunities is to consider their usefulness over a long-term period of time. That generally means that while I like to look at technical charts and identify near-term patterns to get an idea of what the market is doing with a stock right now, I have to use a stock’s underlying business to determine whether or not there is a good reason the stock should be worth a higher price in the future. If there isn’t, more often than not I’ll set the stock aside and go find something else.

That isn’t to say that there aren’t times and settings when a good short-term trade is the smart way to go. I like to look for opportunities that I believe offer a combination of high reward and low risk, with the best probability possible that the trade will go my way. Those can be tough to find on a short-term basis (where probabilities usually run in the 25 – 30% at best), but from time to time they do show up. Fastenal Co. (FAST) looks like it could be a good example right now.

Fundamental and Value Profile

Fastenal Company is engaged in wholesale distribution of industrial and construction supplies. The Company is engaged in fastener distribution, and non-fastener maintenance and supply business. As of December 31, 2016, it distributed these supplies through a network of approximately 2,500 stores. Its customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers (OEM) and maintenance, repair, and operations (MRO). The non-residential construction market includes general, electrical, plumbing, sheet metal and road contractors. Other users of its products include farmers, truckers, railroads, oil exploration, production and refinement companies, mining companies, federal, state, and local governmental entities, schools and certain retail trades. Its original product offerings are fasteners and other industrial and construction supplies, many of which are sold under the Fastenal product name. FAST has a current market cap of $15.1 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 32%, while sales grew a little over 13%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.

Free Cash Flow: Free Cash Flow is healthy, at a little more than $412 million over the past twelve months despite its decline over the last quarter.

Debt to Equity: the company’s debt to equity ratio is .18, which is a low, very manageable. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with healthy cash reserves as well.

Dividend: FAST pays an annual dividend of $1.48 per share, which translates to an annual yield of 2.81% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for FAST is $7.55 per share. At the stock’s current price, that translates to a Price/Book Ratio of 6.96. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Industrial Distribution industry’s average is 4.6, so FAST’s Price/Book ratio is well above the industry average, which to a fundamental investor is a clear sign of the stock’s overbought status.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action: Over the last year, the stock’s trend is up, coming from around $41 to its current level a little below $53 per share. Its 52-week high was reached in early March at nearly $59 per share, followed by a short-term downward trend that was halted in early May at around $48. The stock has since rallied from that point to its current price.

Trends and Pivots: The diagonal, dotted red line indicates the stock’s intermediate trend, which is mostly down despite the upward momentum of the last month. This is true primarily because after rallying to about $54, the stock dropped back a bit lower from that point. That pivot high marked a pause of the stock’s short-term upward trend that could be opening up the trading opportunity I’m writing about today. The A, B, and C labels mark the pivot points that create a classic ABC pullback pattern, which usually signals a very attractive short-term bullish swing trade.

Near-term Keys: Watch the stock’s movement carefully over the next few days. A move to $54 would break the intermediate trend’s resistance and would act as a good signal point for a good bullish trade, either by buying the stock or working with call options, with a target price to close the trade at around $57.50. On the other hand, a drop below $51 could see the stock break the short-term upward trend support level, which might offer an attractive bearish trade, either by shorting the stock or using put options, with a closing target price at around $48.50.
By Thomas Moore Industrials Investiv Daily
13 Jun
FOX: who wins a bidding war?
One of the biggest stories that had tongues wagging this morning as the stock market opened was a federal ruling late yesterday rejecting an anti-trust appeal by the government to block AT&T’s (T)pending merger with Time Warner Inc. (TWX). Not only did that clear the way for that deal to close sooner than later, it also seemingly could act as a blueprint for a number of other deals going forward. Perhaps the next biggest deal analysts are paying attention to is the Walt Disney Company’s (DIS) proposed acquisition of assets from Twentieth-Century Fox Inc. (FOX). Comcast Corporation (CMCSA) has long been waiting in the background to jump into the fray in competing for those FOX assets, and the AT&T/Time Warner ruling appears to have been one of the last things the company was waiting on to submit their own competing bid.

A bidding war between DIS and CMSCA could get expensive. When the deal was first announced in December of 2017, it was valued at around $52.4 billion. Without giving away specific numbers or other details, officials at Comcast said that any competing bid for FOX assets would be all cash, and which some analysts suggest could be valued around $60 billion. FOX has set a meeting for July 10 for shareholders to vote on the proposed DIS deal, which differs from the expected Comcast bid not only in value, but also as a mix of cash and DIS shares.

Who will win? DIS was first to the table, and certainly would seem to have the inside track. The assets they would acquire would fold naturally into multiple existing segments of their business. European sports network Sky, for example gives DIS an way to expand their ESPN sports programming on an international scale they’ve been seeking for some time. The deal also would give them controlling interest in streaming service Hulu, which could simplify the plan they initiated last year to launch their own streaming service to compete with Netflix (NFLX). FOX also controls the rights to Marvel properties like the X-Men franchise, so this acquisition would bring those assets back home.

Don’t underestimate CMCSA’s potential or desire to buy those assets as well. Comcast is the parent company of NBC, Universal Pictures, Telemundo (Latin American broadcasting, including sports programming), Universal Pictures, and DreamWorks Animation, to name just a few of their business segments. They seem to clearly recognize the need to add even more content and distribution capability, since a deal with FOX could include useful properties like National Geographic, FX Networks and the movie studio. And don’t underestimate the impact of Hulu, since whoever gets control of that service finds a strong foothold versus Netflix and Amazon Prime.

Looking at a few of the fundamental and value-based elements of DIS and CMCSA could provide some clues about which company could be a stronger position right now. Let’s dive in.

Fundamental and Value Profile – DIS

The Walt Disney Company is an entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The media networks segment includes cable and broadcast television networks, television production and distribution operations, domestic television stations, and radio networks and stations. Under the Parks and Resorts segment, the Company’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The studio entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays. It also develops and publishes games, primarily for mobile platforms, books, magazines and comic books. The Company distributes merchandise directly through retail, online and wholesale businesses. Its cable networks consist of ESPN, the Disney Channels and Freeform. DIS has a current market cap of $156.8 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 22%, while sales grew a little over 9%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.

Free Cash Flow: Free Cash Flow is healthy, at more than $10.6 billion over the past twelve months. Free Cash Flow has been growing steadily, with only occasional, one-quarter dips since 2013.

Debt to Equity: the company’s debt to equity ratio is .39, which is a low number. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with healthy cash reserves as well. Total cash and liquid assets are approximately 22% of the company’s total long-term debt. Keep in mind that debt would likely increase if a deal with FOX is completed, but to what extent remains to be seen. The company’s relatively modest debt levels suggests they have room to work with in structuring an attractive cash-and-stock deal, and to engage in a bidding war, as all indications are that DIS will be aggressive in pursuing shareholder’s votes in their favor.

Dividend: DIS pays an annual dividend of $1.68 per share, which translates to an annual yield of 1.62% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DIS is $32.35 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.19. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Media industry’s average is 4.6, so DIS’ Price/Book ratio is almost 50% below the industry average and bolsters my argument the stock is being overlooked versus its counterparts right now, despite the buzz surrounding the FOX deal.

Fundamental and Value Profile – CMCSA

Comcast Corporation is a media and technology company. The Company has two primary businesses: Comcast Cable and NBCUniversal. Its Comcast Cable business operates in the Cable Communications segment. Its NBCUniversal business operates in four business segments: Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks. Its Cable Communications segment consists of the operations of Comcast Cable, which provides video, high-speed Internet and voice services to residential customers under the XFINITY brand. Its Cable Networks segment consists of a portfolio of national cable networks. Its Broadcast Television segment operates the NBC and Telemundo broadcast networks. Its Filmed Entertainment segment primarily produces, acquires, markets and distributes filmed entertainment across the world, and it also develops, produces and licenses live stage plays. Its Theme Parks segment consists primarily of its Universal theme parks in Orlando, Florida and Hollywood, California. CMCSA has a current market cap of $150.3 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 17%, while sales grew a little over 11%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.

Free Cash Flow: Free Cash Flow is healthy, at more than $11.4 billion over the past twelve months. Free Cash Flow has declined modestly since the third quarter of last year, but has increased about 25% since September 2016.

Debt to Equity: the company’s debt to equity ratio is .90, which is generally manageable. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with adequate cash reserves as well. Total cash and liquid assets are approximately 9.5% of the company’s total long-term debt. Comcast has indicated that any bid for FOX assets would be all cash, and since analysts are predicting that could be as high as $60 billion, the company would certainly have to raise debt to do it. Considering that their total long-term debt right now is more than $63 billion, a successful bid would make CMCSA the most highly leveraged company in the industry.

Dividend: CMCSA pays an annual dividend of $.76 per share, which translates to an annual yield of 2.35% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CMCSA is $15.22 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.12. I usually like to see this ratio closer to 1, or even better, below that level, but industry-based averages above 1 aren’t uncommon. CMCSA’s Price/Book ratio is only slightly below the Media industry’s average of 2.2, but it is also below its historical average of 2.7, suggesting the stock is discounted right now by about 21%.
By Thomas Moore Disney Investiv Daily M&A
12 Jun
Why Best Buy (BBY) is more like a “bust buy” right now for investors
We all love seeing stocks go up. When a stock’s upward trend lasts for several months, a year, or more, that movement usually translates to big-profit, “home run” trades for those who had the sense to jump in early. BBY is a great example of exactly that kind of trade. It’s a stock that, as of this writing is trading only a few dollars per share away from its all-time high and has more than doubled in price over the last two years. If you weren’t one of those fortunate few who saw the opportunity to get in two years ago, but you saw the strength of the stock’s long-term trend, you’d probably be tempted to consider buying in. The question is, how much opportunity is left, and how much risk do you have be willing to accept for whatever upside remains? Let’s take a look.

Fundamental and Value Profile

Best Buy Co., Inc. is a provider of technology products, services and solutions. The Company offers products and services to the customers visiting its stores, engaging with Geek Squad agents, or using its Websites or mobile applications. It has operations in the United States, Canada and Mexico. The Company operates through two segments: Domestic and International. The Domestic segment consists of the operations in all states, districts and territories of the United States, under various brand names, including Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater, and Pacific Kitchen and Home. The International segment consists of all operations in Canada and Mexico under the brand names, Best Buy, bestbuy.com.ca, bestbuy.com.mx, Best Buy Express, Best Buy Mobile and Geek Squad. As of December 31, 2016, the Company operated 1,200 large-format and 400 small-format stores throughout its Domestic and International segments. BBY’s market cap is $20.6 billion.

Earnings and Sales Growth: Over the last twelve months, earnings decreased by about 36%, while sales grew modestly. It’s generally difficult for a company to grow earnings faster than sales, and in the long term can’t be expected to continue, but it is also a positive sign of management’s ability to maximize their business operations.

Free Cash Flow: Free Cash Flow has declined since the first quarter of 2017 but remains healthy at more than $1.3 billion over the past twelve months.

Debt to Equity: the company’s debt to equity ratio is .23, a very low number that is very positive, especially when the norm for the industry is about three times higher. While operating profits are more than adequate to service debt, their total cash and liquid assets also exceed their total long-term debt by more than 4x.

Dividend: BBY pays an annual dividend of $1.80 per share, which translates to an annual yield of 2.43% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BBY is $12.13 per share. This number has declined in every quarter from a peak at around 15 at the beginning of 2017. At the stock’s current price, that translates to a Price/Book Ratio of 6.09. The industry average is higher, at a little over 12, but their historical average is only 2.9, which means the stock is trading twice as high as it has historically done from a valuation standpoint. At par with that historical average, the stock’s price would be only $35, which I think underscores the kind of risk investors who want to jump in now could be exposed to.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action: Over the last week or so, BBY rallied strongly off of support at around $69 per share. The stock’s all-time highs were reached a little below $80 just last month, followed by a rapid sell off that drove the stock down to its latest pivot low. It is showing strong momentum at the moment as it fills the gap that came when the stock dropped from a bit above $75 to below $71 on an overnight basis late last month. That momentum is likely to be tested between $75 and $76.

Trends and Pivots: I’ve drawn two diagonal lines to illustrate the shift in the stock’s intermediate trend. The blue dotted line represents the trend up to the stock’s mid-May drop. Before that point, the trend provided good support that helped the stock rally to its January high and even establish a new all-time high price at nearly $80 per share; however the stock’s drop at the end of the month below that line, with new pivot low support at around $69, forced a redraw of that trend, illustrated by the dotted green line. The more gradual angle of that line implies a weakening of the intermediate trend, and a break below that support point would mark a major trend reversal that should see the stock drop to at least $62 before finding new support. The horizontal orange line at around $75 indicates where I think the stock is likely to find its next resistance point, and the red horizontal line is near the stock’s all-time highs. In order to extend the stock’s long-term trend further, it would need to break this level. For the time being, this is also where I believe the stock’s maximum foreseeable upside is. That puts the potential upside right now at $7, with downside at $11. That’s a reward: risk ratio of .63:1; smart traders and investors look for this ratio to be 2.5 or 3:1 at minimum.

Near-term Keys: Watch the stock’s movement carefully. If the stock manages to push above $80, it would establish new all-time highs and force a complete reevaluation of the reward: risk profile I just outlined. On the other hand, a break below $69 – which I believe is more likely – would see the stock drop as low as $62 per share in the near term, which might offer an attractive bearish trade, either by shorting the stock or using put options.
By Thomas Moore Investiv Daily Retail
11 Jun
GT is super-undervalued; is it time to buy?
Before the beginning of 2018, finding stocks that you could really call undervalued in any kind of realistic sense was becoming more and more difficult, simply because the broad market had been following a nearly uninterrupted upward trajectory since 2012, extending the bull market in the United States into a ninth year. Since that point, there has been a lot of uncertainty in the market, driven by geopolitical concerns, such as a trade war between the U.S. and its largest trade partners, rising interest rates and worries about accelerating inflation. That has driven a lot of stocks in the market down to levels that would make any value-oriented investor start to pay closer attention. GT fits into that category; after hitting a peak at nearly $35 per share in late January, the stock tumbled more than $10 per share at its lowest point, reached just last week. That’s a decline of more than 28% since the end of January until late last week.

Of course, the mere fact that a stock is trading at a discount relative to historical highs isn’t enough by itself to say that the time is right to jump back in. Stocks that get beat down to extreme lows often have good reasons for investors to treat them that way; sometimes there are really critical problems at the business that make the stock’s higher price levels completely unreasonable. GT’s story doesn’t fit exactly into the picture I’ve just described, and truthfully there are some important external factors at play, like tariffs on autos imported from Mexico, Canada and the European Union, as well as higher crude prices, that I expect could continue to keep pressure on the stock in the near term; at the same time, however I think there is an interesting argument to make right now about this stock as a good value-oriented opportunity.

It’s important to note that while concerns about things like tariffs and increasing crude costs might impact companies like GT in the long term, nothing is certain. Even now what impact tariffs will actually have, and whether they will hold on a long-term basis remains to be seen. While these are issues to be aware of and worth paying continued attention to, they also shouldn’t discourage you from considering the stock as a good investing opportunity if the right conditions show themselves.

Fundamental and Value Profile

The Goodyear Tire & Rubber Company (GT) is a manufacturer of tires. The Company operates through three segments. The Americas segment develops, manufactures, distributes and sells tires and related products and services in North, Central and South America, and sells tires to various export markets. The Americas segment manufactures and sells tires for automobiles, trucks, buses, earthmoving, mining and industrial equipment, aircraft and for various other applications. The Europe, the Middle East and Africa (EMEA) segment develops, manufactures, distributes and sells tires for automobiles, trucks, buses, aircraft, motorcycles, and earthmoving, mining and industrial equipment throughout EMEA under the Goodyear, Dunlop, Debica, Sava and Fulda brands. The Asia Pacific segment develops, manufactures, distributes and sells tires for automobiles, trucks, aircraft, farm, and earthmoving, mining and industrial equipment throughout the Asia Pacific region, and sells tires to various export markets. GT’s market cap is $6.1 billion.

Earnings and Sales Growth: Over the last twelve months, earnings decreased by a little over 32%, while sales grew slightly.

Free Cash Flow: Free Cash Flow is healthy, at a little over $200 million over the past twelve months. This number has declined since late 2015 when it peaked at about $1 billion.

Debt to Equity: the company’s debt to equity ratio is 1.13, which is a little above what is normally considered desirable; however their balance sheet indicates operating earnings are more than sufficient to service their debt. Cash and liquid assets are also healthy and translate to a cash yield of more than 10%.

Dividend: GT pays an annual dividend of $.56 per share, which translates to an annual yield of 2.18% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GT is $20.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.23. The Media industry’s average is 1.9, while their historical average is 2.375. If you use the industry average as a more conservative long-term target, the stock could rise to about $39 per share, which is above its highest point in almost 20 years.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action: Over the last week or so, GT found support at around $24 per share and has bounced a little bit from that point. The stock has been under a lot of pressure since late January, with the biggest drop occurring in February, after which the stock’s downward trend began to decelerate a bit. The current support level looks like it could mark trend support for the time being, while the stock’s pivot high in mid-may a little above $26 is the most likely next resistance point.

Trends and Pivots: The red diagonal line represents the stock’s intermediate-term trend, which is clearly down. In the last couple of days the stock has broken above that line and appears to be building some good bullish momentum. The solid, horizontal green line represents the stock’s most immediate support level, which is a little above $24, and the dotted red line marks where I think the stock is likely to find its next point of resistance, just a bit above $26 per share. If the stock is to truly break the strength of the intermediate-term downward trend, it will need to break above that resistance. I think a move to anywhere from $26.50 to $27 could mark the beginning of that reversal. If the stock breaks down and moves below its current support around $24, it would likely continue to drop to as low as $19, which marks a pivot low point the stock last saw in late 2015.

Near-term Keys: Watch the stock’s movement carefully over the next week or so. A move to $26.50 or $27 would mark a big bullish breakout and should give the stock plenty of room to rally into the $30 range and possibly higher; that could offer an attractive bullish trade, either by buying the stock or working with call options. On the other hand, a break below $24 could see the stock drop as low as $19 per share in the near term, which might offer an attractive bearish trade, either by shorting the stock or using put options.
By Thomas Moore Auto Industry Investiv Daily
08 Jun

Is DIS undervalued? I think so

We’re moving fully into summer, and that means kids are home from school and families are planning vacations. Growing up as a kid, and then again as a parent, it seemed like Walt Disney theme parks always found their way into my family’s vacation plans. More →

By Thomas Moore Disney Entertainment Investiv Daily Netflix Valuations
07 Jun

KR could rebound and rise more than 25%

We’ve watched volatility in the broad market increase significantly this year compared to last year, and some of that was a reflection of uncertainty about the economy’s health and sustainability moving forward. Those are conditions that usually give investors a reason to look for more conservative, defensive types of investments, and in the stock market, one of the sectors that usually provides that comes from the Consumer Staples arena. More →

By Thomas Moore Consumer Staples Defensive Stocks Food Investiv Daily
06 Jun
PH is a very interesting value play
Finding good investment opportunities can be a pretty hard thing to do, no matter how much knowledge or experience you have in the market. Part of the problem, I think comes from the nature of the (social) media-driven, instant-information society we live in today. If you pay attention to media news outlets for market information, you’ll usually find that a lot of what gets talked about doesn’t change a whole lot from one day to the next. Politics, monetary policy and interest rates are three primary themes from which the talking heads never really seem to move very far afield.

One of the methods that I have learned is useful as a tool to stay abreast of current market events and to identify pockets of opportunity is called sector analysis. That might sound pretty complicated, but it really just means taking time to pay attention to the different industries that make up our economy. As business flows back and forth from one economic segment to another, you can begin to see specific industries rise into and fall out of favor in the stock market. That ebb and flow creates opportunities within the broader scope of overall market movement to pick industries, and therefore stocks that might be trading at discounted levels but that have a reasonable basis to be trading higher.

The last day or so has given me an opportunity to go through my sector analysis, and I wasn’t really all that surprised to see a few sectors, like Consumer Staples, Real Estate, Financials and Industrials lagging the market. It’s true that since the broad market hit a new all-time high in late January, most sectors are down, or only marginally higher for the year. However, these three sectors have stood out from the crowd. The reasons for that are interesting, and can provide some good insight about where the greatest risks, and best opportunities in these areas are.

The Real Estate and Financial sectors are both being weighed down by the prospect of higher interest rates. While the Fed has generally maintained the posture and attitude towards rates that it has been telegraphing to the market for some time now, there is still speculation that the economy could start heating up more than expected and force the Fed to accelerate the timing and size of rate increases moving forward. I also believe that Real Estate, which has generally seen big gains in property values over the last year nationwide, is starting to reflect some investor uncertainty. At what point does the strength in the economy translate to an overbuilt housing market that will force property values to drop? At what point does the surge in property values reach a tipping point, where average Americans looking to buy a home simply can’t afford it? To what extent will higher interest rates translate to higher mortgage costs that frustrate and stymie home buyers? I think Real Estate right now is acting as an early indicator of much broader economic uncertainty and concerns that have yet to be fully realized or refuted.

Consumer Staples companies include well-known and long-established names like General Mills (GIS), Kraft-Heinz (KHC), and Campbell Soup (CPB). This is a sector that a lot of analysts, myself included, like to think of as a defensive segment of the market; it generally performs well when the market is showing signs of strength, and is usually less sensitive in nature than other sectors, whose cyclic nature leaves them vulnerable to broader economic weakness. If there are signs of economic uncertainty starting to show, defensive stocks like those in this industry should hold up pretty well. That hasn’t been the case for the last few months, as most of names you and I think of immediately when we think about things grocery shopping have been under pressure by shifting consumer trends away from processed and packaged foods to generally healthier, more organic alternatives. This is a trend that I’m not sure is done playing itself out, despite the fact that many of the companies in this sector have terrific balance sheets and overall fundamental strength.

Industrials have been showing some very attractive earnings growth, fueled in part by the Tax Reform Act from December of last year, but for the last couple of months have been under pressure by the looming threat of a trade war that is starting to shows signs of increased costs on a lot of basic materials besides the steel and aluminum imports that recently imposed tariffs on Mexico, Canada and the European Union targeted. Trade tensions with these countries and with China are still playing themselves out, and so making a play in this space could be risky. I think it’s useful to remember that tariffs on imports, while deemed by market analysts and political wags as bad, misguided policy, have also been applauded by a lot of American companies as necessary steps to assure a level playing field on a global scale. I think the opportunities in this sector lie in targeting industries that tariffs are designed to protect, and among those are companies that work in aerospace and defense. PH is a great example of that, with a very solid fundamental profile, and a depressed market price that offers a nice opportunity if you’re willing to take a long-term view.

Fundamental and Value Profile

Parker-Hannifin Corporation (PH) is a manufacturer of motion and control technologies and systems, providing precision engineered solutions for a range of mobile, industrial and aerospace markets. The Company operates through segments: Diversified Industrial and Aerospace Systems. The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. The Diversified Industrial Segment consists of Automation Group, Engineered Materials Group, Filtration Group, Fluid Connectors Group, Hydraulics Group and Instrumentation Group. The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which are utilized on domestic commercial, military and general aviation aircrafts. PH has a current market cap of $23 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 30, while sales grew a little over 20%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. Initially, however it is a good sign that management is doing a good job of maximizing their business operations.

Free Cash Flow: Free Cash Flow has shown strong improvement dating back to the fourth quarter of 2015, when the company reversed a two-year trend of negative Free Cash Flow growth. As of their last earnings report, PH’s Free Cash Flow was more than $1.2 billion.

Debt to Equity: the company’s debt to equity ratio is .82, a number that is generally manageable. Their debt has also declined by a little more than 10% over the past year.

Dividend: PH pays an annual dividend of $3.04 per share, which translates to an annual yield of 1.76% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods uses the stock’s Book Value, which for PH is $44.20 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.9. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Machinery industry’s average is 5.13, putting PH quite a bit below its counterparts. The stock’s historical Price/Book Ratio is 3.2, which is below its current level and could be a sign the stock is fairly valued right now. The stock would have to move about 24% higher to reach par with its industry average, however, which translates to a long-term target price above $210 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action: Over the last week or so, the stock has been dropping from a pivot high at around $184 per share (which I’ve marked B on the chart). The stock does appear to be showing some signs of stabilization over the last few days between $170 and its current price, which I’ve marked with a C on the chart.

Trends: I’ve highlighted the stock’s intermediate-term downward trend, which dates back to its high near $213 in mid-January with the red diagonal line. The stock’s recent decline has been following that line, meaning that the trend is acting as resistance for the stock’s price right now. The dotted green line on the chart traces the intermediate trend’s low point at about $161 along with the stock’s recent stabilization around $170 per share. If the stock’s current support holds, the difference between the short-term upward trend line and the intermediate-term downward trend line will continue to decrease. You think of that like the tightening compression of a coiled spring; the longer that lasts, the more likely there will be a significant move, or release of tension out of that range. If it breaks higher, the stock should see little near-term resistance until it reaches about $184 per share. In the longer-term, and given the stock’s underlying fundamental strength, I think there is a good basis to suggest the stock could revisit the highs it approached at the beginning of the year.

Near-term Keys: Watch the stock’s movement carefully over the next few days. A break above $175 would likely mark a reversal the downward trend and could mark a good bullish trade, either by buying the stock or working with call options. On the other hand, a break below $170 could offer an attractive bearish trade, either by shorting the stock or using put options.
By Thomas Moore Industrial Machinery Investiv Daily Sector Rotation